The Momentum Pendulum Swings

VT Tyndall North American Fund

The Momentum Pendulum Swings

One of the consequences of the dominance of passive strategies in investing today is that when the ETFs rebalance it can have a big effect on markets. Most of the large ETFs rebalance every six months and this has just occurred in one of the largest and most widely followed ETFs, the Momentum ETF (MTUM). This ETF is sizable at $15bn in market cap and selects its stocks based on 6- and 12-month price performance. It has just shifted out of Technology in a major way, reducing its weighting from 43% to 18% and has moved into Financials in an even more pronounced fashion, increasing its position from just 2% to over 32%. This means that this ETF is now a Value + Momentum vehicle:

This has meant many of the popular mega cap stocks have fallen out of this ETF including Amazon, Microsoft and Apple and this has chimed with the underperformance of Technology which has lasted almost a year in some cases. The ARK Family of funds, that we mentioned as a risk factor last month, are now also reflecting this reality:

The flip side of the sell off in Tech has been the big move into sectors that had been long forgotten, Financials and Energy. These two sectors are setting new annual records for inflows as can be seen below:

Given our outlook for interest rates and inflation (both higher from here) we believe that these switches in momentum are likely to be in their early stages. There are many other ETFs that will be reflecting this new direction, and with the huge level of assets that passives govern, this could be very meaningful for performance going forward.

Data source: Strategas Research Partners May 2021

4th June 2021
Read time : 2  mins

This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg
Not for retail distribution – this document is intended for professional clients only

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